A Bailout Fairy Tale

Once upon a time there was a tropical island in the South Pacific in which the natives polished nice shiny marbles made out of the exotic pebbles that sometimes washed up on their shores. In the evenings the tribesfolk would gather around a bonfire and exchange tales and songs. Sometimes they would also exchange the pretty marbles among themselves.

One day a whaling ship was blown off course and anchored in the lagoon of the island. The captain decided to investigate the island civilization. It was discovered that the islanders were all enormously happy and satisfied with their lives, largely because they were so wealthy. "Every single one of us is richer than even the richest whaling captain in your lands," they explained. "You see, each of these shining marbles is worth 100,000 gold nuggets in our economy. We trade them actively among ourselves. Any of us can convert a single marble into cash or real assets at that rate any time we want."

Sure enough, the going rate for domestic trading in the shining marbles was 100,000 gold nuggets each! The marbles could be used to purchase huts, fields, canoes, harpoons, or anything else. "A paradise on earth," observed the captain in his log.

Two years later, the same whaling ship with the same captain made a stop at the same island to take on provisions. But this time the atmosphere there was different. "We are all so depressed," explained the tribesfolk. "Our entire economy has been collapsing for many months. The pretty shiny marbles that were worth 100,000 gold nuggets two years ago have been dropping in value. They are now trading in our local marble exchange for a mere 5000 nuggets each."

Sure enough, the marbles could still be used to purchase mangos, huts, and wives, but at a far less favorable rate of conversion.

"I am a little confused," said the whaling captain. "Help me to understand. The marbles are trading at a lower conversion value, but what has happened to the total number of marbles in the possession of the residents of the island?"

"Oh, that has not decreased," answered the tribal witch doctor. "In fact we have a bit more of them than we had when you were last here, thanks to some new coral pebbles being washed up onto the beaches."

"Ok, so what about the fields and the huts and the canoes?" asked the captain.

"They are all still intact. We have at least the same number of each sort of real asset as we had the last time you anchored here. We have even more marbles and gold nuggets than before."

"But then you are not really any worse off than you were back then," observed the captain.